Taxation Impact on Buy Back w.e.f 1st October 2024

Starting October 1, 2024, significant changes have been implemented in the taxation of share buybacks in India. Previously, companies were liable to pay a buyback tax at an effective rate of approximately 23.3% on the distributed income-the difference between the buyback price and the issue price of the shares. Shareholders, in turn, received the buyback proceeds tax-free under Section 10(34A) of the Income Tax Act, 1961.

Under the new regime, effective from October 1, 2024, the tax liability has shifted from companies to shareholders. Now, the entire amount received by shareholders from a buyback is treated as dividend income under Section 2(22)(f) of the Income Tax Act and is taxed according to the shareholder's applicable income tax slab rates. Consequently, Section 10(34A), which provided an exemption to shareholders on buyback proceeds, has been omitted.

Key implications of this change include

Tax Deduction at Source (TDS)

Companies are now required to deduct TDS on buyback proceeds at 10% for resident shareholders. For non-resident shareholders, TDS is deducted at 20%, subject to the provisions of applicable tax treaties.

Treatment of Acquisition Cost

Shareholders cannot deduct the cost of acquiring the shares from the buyback proceeds for tax purposes. Instead, the acquisition cost is treated as a capital loss, which can be set off against other capital gains or carried forward for up to eight years, depending on whether the loss is short-term or long-term.

These changes align the taxation of buyback proceeds with that of dividends, potentially increasing the tax burden on shareholders, especially those in higher income brackets. It's advisable for shareholders to consult with tax professionals to understand the full impact of these changes on their individual tax situations.